Before we see the first bank failure of the New Year, I’ll provide my annual review of the bank and credit union failures of the previous year. Bank failures have become rare in recent years. That’s unlike what we saw around the time of the 2008 financial crisis. Nevertheless, the risk of a bank failure is real, and the risk of depositors losing uninsured deposits is also real. This point was made clear in December when Washington Federal Bank for Savings of Chicago failed and uninsured deposits were not covered.
A total of eight banks failed in 2017. The number went up from 2016 when only five banks failed, but it’s the same number that failed in 2015. It doesn’t seem likely that we will be going back to the pre-financial crisis times when we saw years with no bank failures. And unless we experience another financial crisis, I don’t think we’ll see the numbers that we saw from 2009 to 2011 when a total of 389 banks failed for those three years. The year 2010 had the highest number of bank failures since the 2008 financial crisis. If you were a DA reader back in 2010, you probably remember my Friday bank failure posts. Almost every Friday, multiple banks failed. I’m glad to have my Fridays back. The small number of bank failures that we’ve seen for the last three years is a positive sign of a stronger economy and a more healthy banking industry.
The summary below shows the number of bank closures per year since 2005:
- 2005: 0
- 2006: 0
- 2007: 3
- 2008: 25
- 2009: 140
- 2010: 157
- 2011: 92
- 2012: 51
- 2013: 24
- 2014: 18
- 2015: 8
- 2016: 5
- 2017: 8
More News on the Failure of Washington Federal Bank for Savings
The December failure of Washington Federal Bank for Savings is one of the most disturbing and unique bank failure that I’ve seen. As I reported in my December post, the failure was a surprise based on the financial numbers. That and the suicide of the bank's chairman, CEO and president, John Gembara, 12 days before the closure suggest that the financial numbers that the bank reported to regulators weren’t real.
This Crain's Chicago Business article provided some new information on the bank failure. The title of the article sums up the bank failure, “Something really funky went down at this failed Bridgeport thrift.” According to the article, the bank “hadn't absorbed a loss on a single loan for more than five years.” A large majority of the loans were home loans. The bank had reported a total of $137 million in loans, yet the acquiring bank only agreed to accept two loans which “were personal loans, backed by deposits, with a collective value of a little more than $400.” The FDIC didn’t even allow the acquiring bank to review the majority of the loans.
2017 Bank Failures: 5 of 7 Were Small Community Banks
All but two of the 2017 bank failures were little-known community banks. One trend that started in 2010 and has continued through 2017 is that fewer large banks are failing. In 2017, only three of the eight failed banks had assets over $200 million. Two banks that failed in 2017 did have over $1 billion in assets: First NBC Bank, New Orleans, LA ($4.74 billion in assets) and Guaranty Bank, Milwaukee, WI ($1.01 billion in assets). This was a change from 2016 when all five failed banks had assets of $103 million or less, but it’s nowhere near what we saw in 2010 when 23 banks with assets over $1 billion failed. The largest bank that failed was in 2008 when WaMu was closed. It had $307 billion in assets. WaMu still holds the record for the largest U.S. bank to fail.
The small size of the 2017 bank failures helped keep down the cost to the FDIC Deposit Insurance Fund (DIF). The FDIC reported a DIF balance of $90.5 billion at the end of Q3 in 2017. This is up considerably from the previous year when the DIF balance was $80.7 billion. The FDIC reported a DIF balance of negative $7.4 billion at the end of 2010. At the end of 2008 when it was clear that many banks had to be closed, the FDIC increased the premiums it charged banks for deposit insurance. With the number and size of failed banks way down, this has resulted in lower premiums which will make it a little easier for banks to offer higher deposit rates.
Deposits of All 8 Failed Banks Were Assumed by Other Banks, With 2 Important Notes
For the previous years since the financial crisis, the FDIC has been able to find buyers for the vast majority of banks that failed. In those cases, the acquiring banks assumed all regular deposits including amounts over the FDIC limit. So for most people who had deposits over the FDIC limit at these failed banks, they were lucky. No uninsured deposits were lost. The only exception was brokered deposits. It was common that the acquiring banks did not assume some brokered deposits. The banks probably didn't see any benefit from assuming these types of deposits since there are no relationships with the depositors.
All of the eight banks that failed in 2017 were acquired by another bank. However, the bank that acquired Washington Federal Bank for Savings of Chicago in December did not assume the uninsured deposits. Deposits above the FDIC limits were at risk of being lost. This is what the FDIC stated in its FAQs for customers of that bank:
If you had more than $250,000 in your account(s), or if the total of your related accounts exceeds $250,000, your accounts may require review by an FDIC Claims Agent. Please contact the FDIC Call Center at 1-877-367-2718 to schedule an appointment with an FDIC Claims Agent.
Another thing to note about this FAQ is that customers with deposits over $250,000 may have to go through a review process with an FDIC Claims Agent even if the deposits are insured. As long-time DA readers know, there are many ways to insure deposits above $250,000 at one bank by owning accounts under multiple ownership categories and by designating multiple beneficiaries in revocable trust accounts. However, the insured amount over $250,000 isn’t always straightforward to determine. For example, if an individual is listed as a beneficiary, that person must be alive. If that person is deceased, the additional insurance coverage is lost without a grace period. I assume that part of the FDIC Claims Agent review process involves that type of verification.
Another bank failure in 2017 had an atypical deposit assumption agreement. That was the failure of First NBC Bank in April. In that case only transactional accounts were assumed. The acquiring bank, Whitney Bank, did not agree to assume CDs. It has been common for banks to not assume brokered CDs, but this was the first case in which a bank decided to also not assume direct CDs. However, this did not result in the loss of any deposits. For the direct CDs and IRAs that were not assumed by Whitney Bank, the FDIC mailed checks for the total balance of those accounts.
For the other six bank failures in 2017, all deposit accounts, including brokered deposits, were assumed by the acquiring banks. That included deposits above FDIC coverage limits.
The Loss of High CD Rates When Your Bank Fails
The main issue for depositors when banks fail is the loss of the high interest rate on their existing CDs. By law the acquiring banks are allowed to lower the interest rates on existing CDs. The depositors are free to close the CDs without a penalty. In the past few years, this was probably more of an issue since depositors may have seen the closures of their CDs that were opened when rates were high. With this ultra-low interest rate environment lasting so long, probably few CDs closed in 2017 had high rates.
None of the eight acquiring banks publicly announced their policy on the existing CDs from the 2017 failed banks. For all of these cases, the FDIC just provided the following about interest rates:
Interest on deposits accrued through close of business the day the bank was closed will be paid at your same rate. Current rates will be reviewed by the new bank and may be lowered; however, you may withdraw funds from any transferred account without early withdrawal penalty until you enter into a new deposit agreement.
Credit Union Liquidations
There were 5 credit union liquidations in 2017. Unlike banks, we didn’t see a spike of credit union failures during the financial crisis. The number of failures haven’t changed much in the last few years. There were 11 credit union liquidations in 2016. Below is a summary of the number of credit union liquidations since 2012:
- 2012: 15
- 2013: 14
- 2014: 12
- 2015: 11
- 2016: 11
- 2017: 5
In previous years the failed credit unions were often tiny with assets under $10 million, but in 2017, three of the failed credit unions had assets over $10 million. The largest was Shreveport Federal Credit Union of Shreveport, LA which had assets of $86 million.
For all but one of the 5 credit union failures, the NCUA was able to find another credit union to assume deposits of the failed credit union. The only failed credit union in which the NCUA wasn’t able to find another credit union to assume the deposits was a tiny Florida credit union that failed in March which had only $1.8 million in assets. For this case the NCUA should have paid members a check for their insured deposits. The only worrisome issue is that poor record keeping by the failed credit union could have complicated this process. I don’t know of cases of members not getting back their insured deposits. The reason why I bring up the record keeping issue is that for this credit union failure, the NCUA had the following note in their press release:
NCUA’s Asset Management and Assistance Center will issue correspondence in the near future to individuals holding verified share accounts in the credit union.
Credit Union Conservatorships
Besides being liquidated, a troubled credit union can be placed into conservatorship in which the NCUA takes over the management of the credit union with the goal of resolving the issues. If the issues cannot be resolved, the NCUA will either arrange for a merger of the conserved credit union into a healthy credit union or liquidate the credit union.
In 2017, a total of seven credit unions were placed into NCUA conservatorship. Six of those are still operating under conservatorship. One of the seven, Riverdale Credit Union, was liquidated just over five months from when the conservatorship started.
The largest and most well-known of the conserved credit unions is Melrose. It’s a large New York credit union with assets of almost $1.5 Billion, and it has operated for many years as an open-charter credit union that allows people from any state to join. That and its history of very competitive CD rates made it a popular credit union at DA.
As I reported when Melrose Credit Union was placed into conservatorship in February, Melrose Credit Union’s financial health went downhill fast due to its large exposure to the New York taxi industry which has been under pressure from Uber and other app-based ridesharing services. According to this Credit Union Times article, Melorse “had $1.5 billion in loans backed by taxi medallions.” The value of those taxi medallions have been plunging as the popularity of app-based ride sharing has soared.
LOMTO Federal Credit Union also had large exposure to the New York taxi industry. With total assets just under $200 Million, LOMTO was placed into conservatorship in June.
Due to the problems at Melrose, LOMTO and other credit unions with high concentrations of medallion loans, the NCUA has reported that it may be forced to increase loss reserves for the Share Insurance Fund.
If your credit union is placed into conservatorship, there are two things you should do. First, make sure all of your deposits at that credit union are under the NCUA coverage limits. This is always prudent, but it’s very important if your credit union has been conserved since there is a significant risk of liquidation. Second, make sure you monitor the rates of your accounts. When NCUA takes over management during conservatorship, interest rate decisions may change and account rates could fall significantly. That is what happened at LOMTO in September 2017 when the rate of LOMTO’s Money Market Share account was slashed from 1.25% to 0.27% APY.Before this rate cut, the Money Market Share account rate had never been below 1.15% since DA began tracking this account in 2010.
To monitor rate changes at your bank or credit union, DA’s Bank Alerts System can be very useful. On this Bank Alerts Systems page, select the banks and credit unions you want to follow. You can choose to receive notifications whenever a bank or credit union updates their rates, adds a promotion and when we add a new blog post or a user submits a review for them.
What To Expect for 2018?
We had 8 bank failures in 2017 and in 2015, and in 2016 we had 5 bank failures. We’ll probably see a similar number in 2018. I doubt the number will go up significantly unless the economy takes a major turn for the worse. Also, we probably won’t return to the years of 2005 and 2006 when there were no bank failures. There are still many “problem” banks. In the FDIC's Q3 report, the number of "problem" banks was 104 (down from 105 in Q2). The previous year number had been 132. The FDIC doesn't disclose the banks on this list or the specific criteria it uses to place banks on this list. There are ways that we can make guesses about which banks may be on this list.
In our bank health ratings page, we have a list of the banks and credit unions with the worst Texas Ratios. The Texas Ratio is an industry standard for calculating the health of a bank, but is not the only factor to consider. Our data is based on Q3 2017 financial data from the FDIC and NCUA. A Texas Ratio over 100% is considered at risk.
References to Help Keep Your Deposits Safe:
- FDIC deposit insurance summary
- NCUA deposit insurance summary for credit unions
- Bank and Credit Union Health Page with Listing of Texas Ratios
- Federal and Private Deposit Insurance Coverage Limits
- Maximize Your FDIC Coverage with Beneficiaries
- Review of 2016 Bank Failures